Bet you never thought you’d see a 3PL giving free advice on how to negotiate a better deal with themselves, did you?
At OTW Shipping, we believe great customers are informed customers. It’s just a matter of time before you learn how to negotiate logistics contracts like the big boys. And while we aren’t the cheapest option out there because of our higher service standards, we’re confident we offer one of the most competitive services out there for growing businesses.
So how do you get more of the deals you want when talking with a 3PL? We’re going to explain how 3PLs come up with their pricing and what you can do to negotiate based on their common fee generators.
How do 3PLs Determine Pricing?
According to one of the largest 3PL partners out there, Amazon, the brunt of 3PL costs come from three areas, which drive pricing decisions:
Inbound Shipping and Receiving
Storage and Warehousing
Shipping and Handling
We’ll break down each of these below.
We’ve also previously written in depth about the fees for ShipBob and ShipMonk if you want some real-world examples.
Inbound shipping and receiving costs
When sending your inventory to the 3PL, you’ll frequently pay a fee for sending your goods and when they arrive at the warehouse.
The sending fee comes from the cost of physically transporting your product (many use other providers like UPS or FedEx). Many 3PLs will simply expect you to schedule and pay for your own inbound freight.
Now, the receiving fee is usually calculated based on the labor of unloading, counting, and verifying accuracy of your shipment. Receiving is probably the most crucial component outside of pick and pack for a 3PL. If you start with incorrect inventory, it can have massive implications down the road. We’re talking orders with incorrect products, unexpected inventory discrepancies, and so on. That gets expensive for you! You don’t want a 3PL that doesn’t invest the time to properly receive your product, but it is time-intensive.
Storage and warehousing costs
The next major cost for a 3PL comes from storing your products in their warehouse. Storage cost is usually based on the volume of space your product occupies. While it may seem as simple as paying for the space you take up, from the 3PL’s perspective, they need to maintain a certain amount of space for each of their clients, while also making sure they’re covering the overhead of their building.
You may start with 20 pallets of inventory, but you’ll most likely sell down to 5 pallets before your next shipment comes. You won’t normally be billed for the 15 pallets you’re not using, but the 3PL can’t use those pallets for anything else in the meantime because they need to keep space available for when your next shipment comes in.
Additionally, cost per square foot for industrial buildings skyrocketed during the pandemic and is still on its way up so storage costs are starting to go up as well. With that being said, there are additional factors 3PLs consider when determining storage costs.
A small number of 3PLs use long-term contracts which give you dedicated space in their warehouses. In these cases, you potentially pay a lower flat fee and it’s on you to use as much or as little space as you’d like.
3PLs with multiple warehouses or fulfillment centers can move your products to other warehouses to better reach your customers which can decrease shipping costs. While it’s not technically a storage cost, it is part of managing inventory.
Lot # tracking and serial number tracking make storage of inventory much more complex.
Finally, you might receive upcharges for specific types of products, especially if they require temperature control or special handling.
Then there are general warehousing costs. These are generally activities that are not billed to clients, but cost a lot for the 3PL to maintain. It is heavily labor-intensive to consistently be restocking pick bins, moving inventory around, cycle-counting, and so on.
Shipping and handling costs
Before a product can be shipped, a 3PL has to retrieve the product from its inventory (picking) and package it. The fees here are usually a flat per order fee and a lower additional unit fee based on the labor involved. If the product requires inserts or custom packaging, that will increase fees as it is more touches and more complication for the 3PL. Boxes also take longer to pack than a bubble or poly mailer and take up more space in the warehouse.
Once the product is picked and packed, it’s time to ship. 3PLs in the US will primarily use the “big 3” (USPS, UPS, FedEx) and normally some regional carriers or postal workshare programs like DHL eCommerce. The 3PL will almost always have a small markup on postage. While most clients are confused by this, there are actually reasons behind the markup. There is always a percentage of unattributable charges billed on any carrier invoice and handling claims and communicating with support over missing packages is super time intensive.
From a cost perspective, postage obviously depend on the distance and speed your product travels to fulfill your customer's order. Costs will rise as the distance between your customer’s doorstep and the warehouse where your product is stored increases. That cost also increases when customers choose expedited shipping options over ground shipping.
The product itself plays a role in determining shipping costs based on its dimensional weight. That’s the amount of space a package occupies in relation to its actual weight. The formula for dimensional weight takes the package's volume and divides it by a dimensional factor which varies between carriers. For example, the FedEx formula divides by 139 and UPS uses 166.
Other fees
Finally, some 3PLs may include extra fees for hazardous materials, oversized items, or fragile products. 3PLs like Amazon can even hit you with an extra fee if you don’t follow their prepping and labeling requirements.
How to Reduce 3PL Costs
Now that you know where 3PLs normally incur costs and determine pricing, you have an idea of where to negotiate. Here’s how we suggest you do it.
Negotiate better contracts
A key step in reducing 3PL costs is negotiating a better contract. This is much more easily accomplished at the start of your relationship, but can also be done down the line. 3PLs will be more willing to negotiate with a client who is easy to work with, follows guidelines, communicates, and has consistent volume.
At the same time, if you’re already getting great rates and your 3PL partner is providing exceptional service, I would not focus extensively on cutting costs. If you push too hard on pricing and try to force the 3PL to get too aggressive, the 3PL may have to start cutting corners on service or support to meet those goals. It’s better to pay a good rate for great service than a great rate for bad service.
So how do you start negotiating? First, you should understand your own logistical needs and volume commitments. You’ll want to understand what services you absolutely need and separate services that are “nice-to-haves.”
Once you know your needs, you’ll want to contact multiple 3PLs to see what prices and services they offer. You can then use that research as leverage in your negotiations. Now you know what you need and what the competition is offering, two important parts of negotiating.
If you need help figuring out how to choose a 3PL, we wrote a guide just for you!
From here, it’s all about figuring out what areas of your contract you can adjust or add. Below we’ll break down some of the main ones.
Different ways to negotiate 3PL pricing
1. Provide accurate data
You will not get the best rates by lying to your 3PL and exaggerating current or future volume. You will also not get the best rates by withholding this information from your 3PL entirely.
A 3PL will ask you for your last 30-90 days of order data because they want to understand:
Monthly order volume - more volume = better discount
Number of SKUs per order - less SKUs per order = better discount
Number of units per order - higher number of units per order = lower additional pick fee
Highest moving SKUs - most sales are from a small # of SKUs = better discount
Order location - a 3PL like OTW Shipping can provide you more accurate per order shipping costs with actual order data and determine which location(s) are most cost-effective for you
Packaging type - poly and bubble mailers = better discount
A 3PL may ask you for your SKU catalog as well to figure out:
Number of SKUs - less SKUs = better discount
Smaller SKUs - less storage space per order = better discount
Similarly sized SKUs - less complicated pack out = better discount
2. Simplify your requirements
A 3PL’s favorite customer is: low SKU count, high volume, easy to pack. The more you add complexity with custom packaging, inserts, complex packout, a variety of SKU sizes and shapes, the more it is going to cost. Figure out what you really need and cut the fat. That means dropping low-performing SKUs to decrease SKU count.
While it may seem very simple if you are doing it yourself, the difficulty for the 3PL comes when you have 100+ brands all with unique requirements. So, maybe get rid of the tissue paper (we promise it’s not adding value to your customer).
3. Be malleable to 3PL requirements and understand their needs
The 3PL partnership is a 2-way street. The easier you make it for your 3PL to accomplish their task, the lower they may be willing to negotiate pricing.
This means having super accurate inbound shipments that meet labeling requirements and take minimal time to sort. Keeping consistent and minimal levels of inventory helps reduce storage requirements. Communicating frequently about your storage requirements, sales forecasts, and inbound shipments also helps the 3PL plan labor and space utilization and ultimately be more profitable.
You won’t be able to prove this to your 3PL right off the bat, but when time for contract renewal comes up, it plays in your favor to help them help you.
4. Service level agreements (SLAs)
The MIT Center for Transportation and Logistics argues that a good contract includes key performance indicators (KPIs) and a compensation structure that rewards 3PLs for good performance.
When negotiating, you want KPIs to measure what’s important to you. With these components everyone wins because your contract includes your objectives, how they are measured (the KPIs), and incentives for their efficient completion so you are paying for a job well done.
Those same KPIs are also important in negotiating Service Level Agreements (SLAs) or contractual expectations from your 3PL. For example, you can negotiate an order accuracy SLA to ensure that the 3PL covers return fees if they ship the wrong product. While you would think this would be standard, not every 3PL is going to “make it right” by default.
5. Minimum volume commitments
Minimum volume commitments are an established number of orders, amount of paid warehouse services, or amount of purchased storage space that you are expected to reach each month. The goal of these minimum volume commitments is to ensure consistent business for both you and the 3PL, plus it helps the provider manage their warehouse based on what is actually being used.3PL’s have fixed overhead, regardless if you ship an order or not. If you can confidently deliver consistent order volume, your 3PL may be willing to lower rates in exchange for a promise of guaranteed revenue.
You want to negotiate for a volume commitment that you can maintain based on your business record so you aren’t paying for unneeded space. You can even negotiate a minimum volume commitment that changes throughout the year if your demand is greater during specific seasons.
6. Volume discounts
Scaling flexibility is when your contract is adaptable for business growth so the 3PL still addresses your evolving goals and needs. One aspect to negotiate is pricing discounts as your business increases so you’re not locked into the same rate from when you were just starting. Communication is key so you should also establish a notice period in which you can give your 3PL a heads-up that you’ll need more services. This way no one gets caught off guard and the provider can be adequately staffed to fulfill your orders.
Explore alternative delivery models?
Rather than just relying on one 3PL, you may think to work with multiple 3PLs to improve flexibility and potentially cut costs. For example, you could partner with a 3PL based in the Northeast and one out West so you have more options when adjusting your services and reaching customers. Better still, you might think working with multiple 3PLs can help you negotiate more competitive pricing for each one.
Despite its advantages, a multi-3PL strategy requires greater coordination and work on your part. There’s also a greater risk of miscommunication and errors between 3PLs which could result in unexpected expenses. Realistically, the money you may or may not save isn’t worth the added complexity and overhead for your brand.
Or, choose the right 3PL partner in the first place
Instead of worrying about working with multiple 3PLs or renegotiating a failing contract, the simplest way to reduce 3PL costs is to choose the right partner from the start.
Choosing a 3PL with the right geographic fit with facilities close to your customers can reduce transportation costs because your product does not have to travel as far. You should also look for specialization. When a 3PL focuses on your specific industry or SKU types it can be more efficient thus reducing coordination and transaction costs.
At its core, when comparing 3PLs you should consider a provider’s:
Capability to match your needs
Capacity to handle your business’s growth
Support for you as the customer
And of course, Pricing
Making sure to weigh these factors can help you find the best mix of price and service right off the bat.
Why Choose OTW Shipping For Your 3PL Fulfillment?
Choosing the right 3PL can be hard and cost is a fundamental part of that decision-making process. To make your job easier, you should use a 3PL comparison template like this one that can break down all the information you need when deciding on your provider. Taking what you’ve learned about 3PL costs, it’s time to look at one of the best, most affordable 3PLs on the market, OTW Shipping.
When you ship with OTW, you get:
99.99% order accuracy
Transparent rates and custom quotes to fit your needs
Multiple locations for optimized shipping speed and cost
Access to a Slack-like channel where you can chat with our team directly
State-of-the-art warehouse management software
And much more
Interested in a quote? Let's get you a custom quote today.